By Nina Mehta

Everyone grumbles that the weather is a great spoiler of outdoor plans, but now when the sun darts behind steely clouds and it rains on your parade, you can swap your sorrow for a wad of cash.

RainDay.com, an Internet company owned by Manhasset, N.Y.-based Worldwide Weather Insurance Agency Inc., a weather insurance and derivatives specialist firm, began offering retail weather derivatives to the public on November 1 last year. The site boasts a slew of contracts, including short-term protection against fog, lightening and cloud cover, which threaten film shoots, sports events and other commercial ventures. But what the firm hopes will hold more populist appeal is insuring against rain on a person's birthday or on all—or half—the days of a vacation almost anywhere in the world. Its frisky approach to meteorological disappointment: "When It Rains...It Pays!”

The site provides free quotes for specific weather events on-line. After the premium payment is cleared through the insurer, RainDay sends out a simple weather insurance policy guaranteeing payment of the notional amount of the contract once the risk event is confirmed by the closest National Weather Service station (agreed on in advance). The maximum protection for single days is $50,000 and, for vacations, $100,000.

If your birthday is, say, January 30 and tee time at Pebble Beach is 2 p.m., you can buy $10,000 of insurance against 1/100 of an inch of rain (a light shower) from 2–3 p.m. for $1,203.20.

The premiums for RainDay's contracts are not cheap. The rate on line—the standard insurance metric that tracks premium divided by coverage—is 15 percent to 20 percent on average for single-day insurance plays, which is generally considered a handsome bet for the insurer. RainDay's pricing is based on city, region and time of year, but, says Harold Mollin, the CEO and president of Worldwide Weather, the cost to the consumer shouldn't be prohibitive.

"We quantify what we see as the basis risk, the burn rate, the propensity of the event happening, and then we add loading,” he notes. "But it is no more expensive than auto or home insurance. It just happens that rain happens more often. The number of times you drive your car and get into an accident vs. the number of times you drive your car and it gets rains on—hopefully, it rains more.”

Well, yes, but that still leaves open the question of predicting the weather in advance, since customers are betting on exact hours.

Events only

RainDay is fundamentally different from the established weather derivatives market, points out Paul Murray, managing director at Castlebridge Weather Markets, a market-making firm, since "it is exclusively event-driven, whereas the weather derivatives market is about seasonal, usually temperature-based climate.” If the institutional market is more concerned with replicating cash flows through degree-day put options and spread trades, RainDay, he notes, "seems more like pure insurance.” Contracts in the traditional market are also worth a lot more to insurers.

In terms of competition, order flow from retail clients would have to be a virtual torrent before institutional players found it worthwhile to get into the market and to properly diversify their risk across dates and cities. For traditional weather specialists, the additional hurdle is that "it's considered gaming,” says Ellen Slote Bernardeau, a weather derivatives broker at Eurobrokers. "It's like what you do in Atlantic City or Las Vegas. It's very unusual to get coverage for what is essentially a digital—an all-or-nothing—option in which the payoff is triggered by the actual strike rather than a spread, over a short risk period such as 10 days or less.”

So far, RainDay has written only a handful of retail weather contracts. But in the next six months, Mollin hopes to roll RainDay out to people living in the Far East, South Africa and Europe.

The company is also moving into the greeting-card business. It will soon be possible, adds Mollin, to send a birthday card either through RainDay.com or a major greeting-card company to someone covering any hour or combination of hours of the person's "special day” against rain. Not everyone may find this sufficient recompense for getting a year older, but maybe, as has been said before, it's the thought that counts.

If you want to trade stock options these days, you could find yourself a bit overwhelmed by the multiple listings available for major companies on competing exchanges. A new web offering could help.

Last October, Interactive Brokers, a subsidiary of the Timber Hill Group, a proprietary trading and market-making firm, announced the creation of a new electronic communication network capable of executing trades on stocks, futures and options on a number of U.S. and international exchanges. But unlike Instinet and others among the new coterie of ECNs, Interactive Brokers' Trader Workstation can run entirely over the Internet.

The system, which can be down-loaded at www.interactivebrokers.com, offers direct access to NYSE- and Amex-listed stocks; Nasdaq's SelectNet and the major ECNs; a variety of equity and index options; Standard & Poor's 500 and Dow Jones futures; and U.S. Treasury bond futures. Besides linkages to the major U.S. equity, futures and options exchanges, the system links with exchanges in Canada, the United Kingdom, France, Germany, Switzerland, Sweden, the Netherlands, Spain, Italy, Australia, Hong Kong and Singapore.

The system's main selling point: if offers automated trade routing that guarantees the best execution for U.S. equity options, which in the past few months have witnessed an unprecedented multiple-listings war as options exchanges prepare for the all-electronic International Securities Exchange. Using the Trader Workstation, an investor interested in trading, say, options on Dell Computer automatically gets the best price, whether that's at the Philadelphia Stock Exchange or the Chicago Board Options Exchange.

Interactive Brokers has priced the system aggressively, charging a penny per stock share, $1.95 for an option contract and $4.95 per futures contract.

Besides the Internet-based architecture, Interactive Brokers offers the system on a dedicated line basis, to offer institutional investors quicker access. "I won't say the system is merely professional caliber—this is quite literally the same system, not dumbed down, not slowed down, that Timber Hill uses for its own market-making,” says Tom Asher, executive vice president at Interactive Brokers. "One of the biggest market-making firms in the world has pulled its be-all, end-all proprietary high-speed network out of the stealth fighter hanger and has said, by the way, we're now offering rides.”

The secretive world of hedge funds looks like it's going to get a lot less clubby, thanks to the Internet. Last October, Hedge World (www.hedgeworld.com) took to the ether, offering, among other things, the ability to trade hedge funds on-line. A few weeks later, another web site, Hedgefund.net, which had been kicking around since 1997, announced that it has plans to offer a startlingly similar service in the first quarter of this year.

Hedgefund.net bills itself as the hedge fund version of Schwab's One Source, which lets investors trade in and out of mutual funds on-line. Investors will be able to open accounts through an as-yet-unnamed international bank, and the accounts will be monetized by cash or limited partnership interests in specific funds.

Trading, however, is only the latest of Hedgefund.net's business efforts. The site already offers investors free access to—and reams of information about—more than 1,200 hedge funds. The site provides detailed fund screeners based on 33 investment strategies and sub-strategies, and ranks funds based on 10 separate criteria.

The foundation for all this material is the mother lode of information on each of the funds covered by the site. Among the data: return statistics, including year-to-date, monthly and highs and lows; risk analysis measures such as Sharpe and Sortino ratios, standard deviations, alpha and beta; qualitative data, including nuts and bolts information about the fund; and contact information.

The site also offers a unique service to hedge funds: It will take a position in a fund and handle some of the maintenance work. "We've been focused lately on building the distribution channel for hedge funds,” says Alex Shogren, founder and president of HedgeFund.net. "We have an ownership stake in one hedge fund, and we have begun to act like a venture capital firm. We'll find a guy from [a big investment bank] who's trading derivatives, and ask him if he wants to start his own hedge fund. If so, we'll partner with him, take an equity stake in his business, and allow him to sit in front of his Bloomberg screen all day trading derivatives. We do everything else—the marketing, investor relations, back office, accounting, everything.”

Shogren believes the services he provides are desperately needed in the hedge fund world. "Because hedge funds are very private, there's a huge information gap between investors and managers. As a contract marketer, we fill that gap—we find good funds and contract with them to pay us to introduce them to investors. Then we go out and solicit funds from investors. That's a vital role, because investors often don't know the managers.”

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Insurers Slow To Embrace Derivatives

The much-prophesied convergence of the insurance industry and the capital markets may be taking place in the securitization arena, but many insurance company CIOs are still wary of using derivatives for their own exposures, according to a new report by Goldman Sachs titled "The Goldman Sachs Insurer CIO Survey.”

Derivatives use in virtually every category declined last year. In last year's survey, for instance, the majority of CIOs predicted their use of options would rise. But options use actually declined this year, falling from 53 percent to 23 percent of those polled.

The study found that the size of the insurance company continues to be correlated with its derivatives usage: The bigger the company, the more derivatives were used. (See Figure 1.)

Although hedging interest rate and currency risks continued to be the most popular reasons for using derivatives, the percentage of insurers using derivatives to replicate securities dropped from 64 percent to 35 percent. That drop, the report explains, is likely a reflection of concern over FAS 133. "Since replication strategies are clearly not hedges, but are often either income-enhancement trades or the synthetic creation of assets not available in the cash markets, the derivative leg of the replication will be marked to market through earnings,” says the report.

Figure 1

Derivatives usage at insurance companies. The largest insurers last year continued to be the biggest users of derivatives.

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Morgan Puts Volatilities On-Line

Customers of MorganMarkets, JP Morgan's on-line trading information center, now have access to a new site called the Volatility Center, which offers volatility figures previously available only to brokers and market-makers.

The site claims to post up-to-the-minute volatility numbers in the over-the-counter foreign exchange and precious metals options markets, for the benefit of traders and risk managers. Morgan boasts that the site is the first to offer comprehensive information about implied volatility surfaces in multiple currency pairs, as well as volatility and strike prices for delta-neutral and 25 delta options with maturities out to one year. The site's interest rate screen, meanwhile, covers forward rate agreements and overnight interest rate swaps out to one year.

"The transparency that this site creates will allow our clients to act in the marketplace with greater confidence,” says David Newman, head of Morgan's global foreign exchange and precious metals sales group.

The site offers four main tools: a market matrix of indicative spot rates, forward term structures and volatility surfaces; analytical tools, including the Jump model (an update of the Black-Scholes-Merton option-pricing model geared toward emerging-market currencies), the Chart-O-Rama data visualization tool and the JCOPS option calculator; various trade ideas; and news about the options markets.

In the future, the site will offer real-time pricing for non-benchmark maturities, an expanded product set that includes exotic options, a two-way dealer chat feature, a derivatives research corner and electronic execution.

For more information about Volatility Center, see www.jpmorgan.com/business/fx.